Demise of the Dollar

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QE2 Fuels a Global Fury - Mark Thornton

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The Federal Reserve has been busy the last three months pumping up the money supply by $300 billion dollars, with much more promised in the months ahead. Some of the results have been painfully predictable, others less so.

Fed chairman Ben Bernanke said he did this to stimulate housing and employment. The unemployment rate has fallen in recent months, but most market analysts are skeptical that the statistical improvement is real or lasting.

The headline numbers on housing also appear good, with building permits increasing 16.7 percent in December. However, units actually "currently under construction" came down by the same amount, 16.7 percent. Housing starts decreased in December by 4 percent and starts of single-family homes were down by 9 percent.

Even the improvement in building permits indicates continuing trouble. The increase in permits occurred mostly in the Northeast and West, and the bulk of the increase was for multiunit structures (i.e., apartments and duplexes). This makes sense, given that people are losing their homes or downsizing into apartments due to budget constraints.

Also, the number of permits issued in December 2010 was 7 percent less than in December of 2009. Likewise, housing starts were 8 percent lower this December than in the previous year.

One factor weighing on the housing market was interest rates. Mortgage rates have started to increase along with bond yields. Presumably, Mr. Bernanke thought QE2 would have reduced mortgage rates, but he recently testified to Congress that the new higher rates are actually a sign of "green shoots" in the economy. Higher rates could be a sign of economic confidence, but other signs indicate lenders are concerned about inflation and are raising rates to account for the falling value of the dollar.

The price of everything seems to have skyrocketed. Only housing, the dollar, and inflation-adjusted income are negative. World food and commodity prices are up 28 percent over the last 6 months. The MIT "Billion Prices Project" confirms that prices have been surging higher than indicated by the consumer price index. Entrepreneurs tell me that big price increases are already planned for everything from vegetables to blue jeans.

Higher food prices set off the revolutions in Tunisia and Egypt and the mass protests in countries like Algeria, Jordan, Yemen, Bahrain, and Iran. People in these countries buy more unprocessed foods and spend a much higher percentage of their income on food, so they have been severely impoverished by Bernanke's QE2.

Bernanke claims that monetary policy cannot change the quantity of wheat by one bushel and that higher food prices are the result of bad weather conditions in Russia and Australia. However, bad weather does not explain why the prices of virtually all food and nonfood commodities have increased substantially in recent recessionary times. This is clearly a case of too much money chasing too few goods.

Of course, it would be incorrect to credit Bernanke for freeing the Egyptian people, because food prices were only the trigger, not the true cause of all this social unrest.

However, it is surely correct to credit Bernanke and his fellow central bankers for worldwide commodity inflation.

Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the book review editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition, coauthor of Tariffs, Blockades, and Inflation: The Economics of the Civil War, and the editor of The Quotable Mises, The Bastiat Collection, and An Essay on Economic Theory. Send him mail. See Mark Thornton's article archives.